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Presented by: Jeff Wegner, Kutak Rock LLPEvan Bossard, Wintrust Franchise FinanceJon Tibus, Alvarez & Marsal

Franchise Discussion Panel

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Shelter in Place ImpactRestaurants declared “Essential Businesses”

• With dining rooms closed, restaurants positioned with established off-premises sales channels (drive-thru, delivery, carryout, curbside), a strong digital presence (apps, online), and transportable food have fared much better. Drive-thru – McDonald’s, Wendy’s, Taco Bell Strong Digital Presence - Dominos, Wingstop Transportable – Pizza, Wings

Lender Response• Triage payment relief requests for most critical customers with a focus on casual

dining (i.e. Denny’s, IHOP, Applebee’s), which has no drive-thru, little digital presence, and questionable food transportability.

• Given the uncertainty of timing, work in 90-day increments• Provided principal and interest relief for most casual dining customers• Provided principal relief for many QSRs (quick service restaurants)• Permitted LOC draws (instead of potentially citing MAC clauses)• Suspended covenant testing for one or two quarters• Required more frequent reporting including weekly sales, weekly cash flow forecasts,

and monthly financial statement reporting• Underwriting focused on cash burn and preservation and a “Shared Solution” from

other parties

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Shared SolutionFranchisor Cooperation

• Deferring or abating royalty and/or advertising fees• Providing rent relief where applicable• Ceasing development and remodel requirements

Payroll Protection Program (“PPP”)• Government issued a $310B program to provide small businesses (generally

under 500 employees) with forgivable loans to be used primarily for payroll.• Many franchisees fell under a total employee exception that allowed for certain

NAICS codes to still receive PPP funds regardless of employee head count.• Franchise estimates the PPP proceeds is equivalent to a full turn of leverage

across its entire portfolio• Loan Forgiveness a huge focus and guidance changing almost daily

Other Sources• Rent relief from Landlords• Reduced or eliminated officer and/or corporate overhead compensation• Extended terms from suppliers• Reduced or eliminated fees from delivery services• Local taxing authorities deferring sales tax payments

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Progress to Date – QSR’s• QSRs have been less impacted as drive-thru, carry out, and delivery remain

available• Same stores sales (“SSS”) were generally down 20-30% in the first few weeks, but

have steadily increased showing the resiliency of the industry and expectations of a quick recovery

• Recent example from one Franchise operator, which is somewhat representative of the broader QSR market:

• In addition, sales are more profitable due to: higher margin sales via drive-thru, “better” employees earning the fewer available shifts, and a more efficient cost structure with a closed lobby

• Although there will be some short-term disruption, the pandemic is expected to have nominal long-term impact to sales multiples or lending leverages

Week Of SSS6-Apr -25.4%

13-Apr -23.1%20-Apr -2.3%27-Apr -5.8%4-May 2.4%

11-May 5.8%

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Progress to Date – Casual Dining• Prior to pandemic, carry out and delivery only accounted for 10-20% of sales, so

casual dining restaurants have been highly impacted by restaurant closures• There has been a significant shift to carry out with some casual dining as high as

65% of sales, but more common is 35-40% of sales• Many franchisees have temporarily closed stores due to lack of meaningful carry-

out business, but several restaurants have permanently closed• Restaurants have begun to re-open in several states with encouraging results,

even at limited capacities, which demonstrates pent up demand for eating out.• Nonetheless, recovery is expected to take longer with additional potential payment

relief requests• Longer term, there will be pruning of restaurants, but franchisees will be more

resilient than independents, so could benefit from reduced supply• However, it is very likely that Buyers will look for deals at reduced multiples and

Banks will lend at lower leverages and be very selective to lending in this space

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Pre-Covid Restructuring Drivers Pre-Covid Macro-trends were great: Unemployment trending down for 5+ years

Low gas prices & interest rates = more consumer discretionary spend

Low interest rates & commodities = lower costs

Restructurings were about “culling the herd” for those that couldn’t adapt to: Food-at-Home and Food-away-from-home

Supplier Consolidation driving cost increases

Overcapacity: Low interest rates = too much real estate = too many real estate deals

Trend towards convenience OR experience – the middle gets left out

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Dramatic Impact from Covid 19 Responses Operational: Most dining rooms closed, Some stores closed entirely

Complete reliance on take out and delivery – SSS down 80% +

Casting about for sales – groceries, pantries, meal kits

Rapid adoption of new sanitation standards and mandates – varies by state and locality, greatly challenging multi-state operators

Financial: Federal Money – highly inconsistent, inefficient, rules changing daily

Private Money – Bridge financing from existing lenders, PIPE’s

Landlords and Vendors – near universal non-payment of April and May rents, significant vendor stretch

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Others left out(Ch. 11 or liquidation)

Early OutcomesLarge brands found quick financial support (ability to draw existing revolvers and/or access new capital)

Remainder are burning (or barely maintaining) cash on reduced sales, leaning on suppliers and landlords to survive…but for how long?

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Learnings and Surprises Learnings: Drive-through saves the day – QSRs with drive-through only briefly and

shallowly impacted

Pizza delivery = even better

Concepts already invested in take-out and delivery fared better

Surprises: Plenty of capital available to do deals – more being raised opportunistically

Valuations remain at multi-year highs, in spite of recent pull back (S&P Supercomposite Restaurants at 17.5x vs. 12.0x decade average)

Marketing significantly curtailed, but impact fairly muted

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Restructuring Drivers - Upcoming Operational: Economic headwinds still gathering – recession, reduced consumer spending

Overcoming regulations – limited capacity, 6 ft spacing, sanitation guidelines, etc.

Customer acceptance / comfort levels

Employee retention – unemployment pays better that working in many cases

Potentially significant rebalancing of power between operators and landlords

Financial: Ongoing cash burn issues still haven’t been resolved

“Winners” now have significantly more debt / leverage

Unresolved overhang from significant unpaid rents and aged A/P

PPP Confusion – appropriate use, deductibility, forgiveness provisions

Traditional metrics for underwriting and valuation skewed (EBITDA)

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Rulings of Interest in Early COVID-19 Period

In re Modell’s Sporting Goods, Inc., No. 20-14179 (VFP) (Bankr. D.N.J.Mar. 27, 2020)

Filed Chapter 11 case on March 11, 2020. In response to orders/directives mandating business closures and

sheltering in place, on March 23, 2020 Modell’s sought 60-day “suspension” of bankruptcy proceeding under Section 305 of the Bankruptcy Code (“court . . . may . . . suspend all proceedings in a case under this title, at any time if . . . the interests of creditors and the debtor would be better served by such . . . suspension”).

On March 27, 2020, citing “unprecedented nature of Covid-19 crisis,” the New Jersey Bankruptcy Court granted a suspension to April 30, 2020, freeing Modell’s from paying rent and other operating expenses except utilities, insurance and trust fund taxes.

On April 30, 2020 the New Jersey Bankruptcy Court extended the suspension of the Modell’s bankruptcy case through May 31, 2020.

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Rulings of Interest in Early COVID-19 Period

In re Pier 1 Imports, Inc., No. 20-30805 (KRH) (Bankr. E.D. Va. Apr. 2, 2020) Filed Chapter 11 case on February 17, 2020. On March 31, 2020, relying upon Section 105 of the Bankruptcy Code

(“court may issue any order . . . necessary or appropriate to carry out the [Bankruptcy Code]”), Pier One asked for an order suspending its obligation to make any payments other than employee, insurance, utilities and other “essential” expenses (excluding rent and adequate protection payments).

The E.D. Virginia Bankruptcy Court granted the relief on a temporary basis on April 6, 2020 and held another hearing on April 28, 2020.

The moratorium was later extended to May 31, 2020. While observing that “the world has changed,” the decision was not decided on the legal theories of “impossibility, impracticability, or frustration of purpose.” Instead, the decision cited the absence of a statutory basis for requiring immediate payment to the objecting parties—primarily landlords.

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Rulings of Interest in Early COVID-19 Period

In re CraftWorks Parent, LLC., No. 20-10475 (BLS) (Bankr. D. Del.) Filed Chapter 11 case on March 3, 2020. On March 20, 2020, relying upon Section 105 of the Bankruptcy Code and

citing the unprecedented and unforeseen outbreak of COVID-19, Craftworks asked for voluntary forbearance and a procedures order that effectively forced any party seeking payment to forbear until April 30.

The Delaware Bankruptcy Court entered an order suspending hearings in the case until April 30, 2020.

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2020 Franchise Bankruptcy Filings of Note

In re FoodFirst Global Restaurants (Bankr. M.D. Fla.) Concepts: Brio Italian Mediterranean (“Brio”) and BRAVO Fresh Italian Case filed April 10, 2020 Approximately 100 restaurants operating pre-bankruptcy now reduced by

half due to closures and lease rejections Committed to sale process targeting late June closing DIP Lender (affiliate of Earl Enterprises) is prospective purchaser

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2020 Franchise Bankruptcy Filings of Note

In re CraftWorks Parent, LLC (Bankr. D. Del.) Concepts: Logan’s Roadhouse, Old Chicago Pizza & Taproom, Gordon

Biersch Brewery Restaurant, Rock Bottom Restaurant and Brewery (“Rock Bottom”)

Filed March 3, 2020 Operated 261 restaurants pre-bankruptcy; now at approximately 100 due

to closures and lease rejections Franchisor to approximately 77 restaurants On May 4, 2020 Craftworks filed motion seeking to sell substantially all

assets in a private, non-auction proceeding to an affiliate of Fortress Credit Co., LLC.

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2020 Franchise Bankruptcy Filings of Note

In re American BLUE RIBBON Holdings LLC (Bankr. D. Del.) Filed January 27, 2020 Concepts: Bakers Square, Village Inn and Legendary Baking Operated 97 restaurants pre-petition following pre-petition closure of 50

restaurants with post-petition rejection of the leases for the closed locations. Post-petition, an additional 15 restaurants have been closed with accompanying lease rejections

Three restaurants sold post-petition in private, non-auction sale No publicly announced exit strategy

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2020 Franchise Bankruptcy Filings of Note

In re BL Restaurants Holding, LLC (Bankr. Del.) Concept: Bar Louie Filed January 27, 2020 Operated 110 locations and franchised 24 locations Section 363 Sale of substantially all assets approved on April 29, 2020

through credit bid of lending group

In re Southern Deli Holdings (Bankr. N.C.) Concept: Sonic Franchisee Filed February 3, 2020 Operated 73 franchised Sonic restaurants Section 363 Sale of substantially all assets to an affiliate of Franchisor was

approved on April 10, 2020.

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2020 Small Business Reorganization Act (Subchapter V of Chapter 11) Effective February 19, 2020

Purpose: To streamline, expedite and reduce costs of small business debtor reorganizations under Chapter 11

Eligibility: Business debtors that elect Subchapter V treatment and have secured and unsecured debts totaling, in the aggregate, less than $7.5 Million (debt ceiling amount to be indexed every three years). Conversions to Subchapter V from pending Chapter 11 cases have been permitted for requesting, qualifying debtors

Impact: A preliminary estimate (done before the CARES Act raised the eligibility debt ceiling to $7.5 Million) is that approximately 40% of Chapter 11 debtors in Chapter 11 cases filed after October 1, 2007 would qualify as small business debtors

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2020 Small Business Reorganization Act (Subchapter V of Chapter 11)Significant Substantive Changes:

Plan must be filed within 90 days and only debtor can propose No disclosure statement unless court orders otherwise No Committee of Unsecured Creditors unless court orders otherwise No Absolute Priority Rule. Plan may be crammed down on unsecured

creditors (including secured creditor’s unsecured deficiency claim) if plan does not discriminate and debtors’ “disposable income” for a three-year (or possible five-year) period is committed to paying unsecured claims

No vote solicitation and, therefore, no requirement that one class of creditors accept the plan

Trustee appointed to serve in administrative/oversight capacity Administrative expense claims may be paid over time Discharge granted at confirmation if plan is consensual. Discharge

granted upon completion of plan payments if plan is confirmed over objections